Skip to the content

Warner: Why cautious investors should buy equity income funds for their ISA

03 March 2014

AFI panellist Paul Warner says that older investors with a 10-year time horizon should be buying equity income.

By Thomas McMahon,

News Editor, FE Trustnet

Cautious investors should stick to equity income funds this ISA season to protect themselves from a potential market correction, according to AFI panellist Paul Warner, managing director of Minerva Fund Management.

Warner says that as an older investor – he is 60 – he needs a more defensive investment to protect his capital and equities are the only choice on a 10-year horizon.

The fund manager, who has worked in finance since the 1970s, says he is also very wary of the current sideways market and thinks it is likely to break out to the downside in the near future.

“I think equity markets got ahead of themselves last year and now it’s a case of wait and see, where we have the potential for volatility and I don’t know what’s going to happen in the short-term,” he said.

“I have a feeling that we might well get another down leg. We have been in a sideways market now between 6,800 and 6,300 at the bottom. The fear is we are in that time of the year when you can break out of things.”

Performance of index in 2014


ALT_TAG

Source: FE Analytics

Data from FE Analytics shows that the FTSE has made 1.82 per cent in the year to date, having spiked back from previous losses at the beginning of this month.

Warner says that he fears the market is more likely to break out of its current range to the downside, even if he thinks that over the course of the year it will make decent gains.

Equity income funds appeal to him for their defensive qualities in such a choppy market, he explains: they are a better option than cash because of the return they provide in the form of yield.

Warner says that ultimately he believes the “financial experiment” of huge quantitative easing is likely to ultimately end in inflation, which is another reason to hold equities and not cash.

However, this is likely to appear in the long-term rather than the short-term.

“If you are looking on a 10- to 20-year view, equities are a no-brainer,” he said.

Many investors with a relatively short investment horizon and a low tolerance to risk – usually older investors – are uncertain about what to do with their portfolios at the current time.

Warner explains that the idea that cautious investors should look to bonds for income is a relatively new phenomenon, dating to the past decade.

In the 1970s, when he joined the industry, most people preferred equities for their yield, and we seem to be returning to a similar state of affairs, he says.


Warner says that this year he is looking at Unicorn UK Income, Rathbone Income and Royal London UK Equity Income.

All three have seen significant inflows over the past six months, according to data from FE Analytics.

This is a period in which there has been a huge amount of money looking for a new home following the decision of FE Alpha Manager Neil Woodford to leave Invesco Perpetual and the two giant income funds that dominate the IMA UK Equity Income sector.

Rathbone Income is a more “old school” fund, Warner says, with a greater focus on the traditional large cap defensive end of the market.

Managed by Carl Stick since 2000, it is top decile over five years although is only marginally ahead of the sector average over a 10-year period.

Like other funds of its ilk – Artemis Income, for example – it has been a sluggish performer over the past six months, returning just 4.92 per cent.

It is currently yielding 3.53 per cent.

Performance of fund vs sector and index over 6 months

 ALT_TAG

Source: FE Analytics

It has been the funds that invest more in the mid and small cap areas of the market that have ridden the surge over the period.

Unicorn UK Income is the standout performer in the sector over recent years. It is a top performer over three and five years, although it only yields 2.84 per cent, which is unlikely to satisfy anyone looking for an income to live off.

Performance of fund vs sector and index over 5yrs

ALT_TAG

Source: FE Analytics


Like Rathbone Income, it has five FE Crowns and is a member of the FE Select 100.

The fund, run by FE Alpha Manager John McClure, has grown rapidly following increased marketing.

It was just £83m in size at the start of 2013, but is now at £609m, and some experts have started to question how long it will remain open.

Despite investing in small caps, the fund has an excellent track record of protecting investors’ capital, as FE Trustnet highlighted in a recent article.

Royal London UK Equity Income, managed by Martin Cholwill, invests heavily in the mid cap area of the market.

The fund has actually outperformed the Unicorn fund over the past six months, although the former has taken in more money.

It is a top decile performer over three, five and 10 years, according to data from FE Analytics, and currently yields 3.48 per cent.

Cholwill talked FE Trustnet through his process in a recent interview.

ALT_TAG

Editor's Picks

Loading...

Videos from BNY Mellon Investment Management

Loading...

Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.